Power Sector Oct. Data Review and In-depth Research: Performances set to pick up, Investment value highlighted—Yang Zhishan and Wu Fei—Neutral (Upgrade)

The short-term demand vacuum led to the sudden drop of the power growth. -4.0% and -2.2%, the two negative numbers, recorded the recent new low year-to-year growth rate of the total power generation and consumption in October, respectively. With Olympic factors no longer existing, the short-term macro demand vacuum really fetched down the power growth rate. Chemical, ferrous and non-ferrous industries contributed the most to the negative growth, while most sectors of heavy industry saw a monthly negative growth rate in October. From regional perspective, the negative monthly power growth rate emerged in all the provinces, among which Guizhou and Inner Mongolia contributed the most.

Both generation and consumption will slow down and average thermal utilization hours will drop by 6-9% in 2009. We estimated the power consumption growth rate of 2008 to 2010 as 6.6%, 2.9% and 4.8%, respectively. Assuming that the consumption growth rate of 2009 stands at 0%, 3% and 6%, we estimated the operation rate of thermal power units to drop by 9.4%, 6.0% and 2.4%, respectively. Therefore, the utilization hours will get close to the low since 1998.

Misfortune, that is where happiness depends; thermal power will turn profitable for sure in 2009. There was a 10% slump of the price for 6,000 kcal/kg coal in Qinhuangdao market last week. With the price driven down by the demand side, we think the government will postpone the hike of the power tariff. More than 80% of the thermal plants will benefit from the falling coal prices against the dropping utilization hours.  Assuming 5% less utilization hours and a 10% lower average coal price, we estimated that 300MW thermal units could turn profitable and 600MW units could gain half of the normal average earnings.

Risk factors: Marco economy fluctuation shortened the predicable periods and may lower the forecast accuracy; if the coal prices possibly get support by production limitation or macro recovery, thermal power will slow down the recovery.

Considering the value for investment portfolios, we upgrade the rating of the industry to “Neutral”. Power industry is currently one of several sectors which are bottoming out and picking up. Compared with those industries just entering the descending channels, the power sector is notably attractive.  Static P/B are between 1.1~1.8X for most companies, while the fair range should be 1.5~2.0X. Thus, we upgrade the rating of the power sector to “Neutral”. We pick Huaneng (600011), Guangdong Electric Power (000539), GD Power Development (600795), Jiantou Energy (000600) which benefit form the dropping coal prices; Guiguan (600236) for its improved fundamentals and extreme resilience; Guotou (600886) for its stable performance and Baolihua and Jinshan for their rapid growth and relative low P/E.